Allied Legal’s commercial and starup lawyers regularly advise on fundraising transactions. When it comes to startup funding, venture capital and angel investors are often mentioned in the same breath. However, there are certain important differences which we outline in this article. As a general comment the differences noted in this article should be regarded as broad “rules of thumb”.
Key Differences
1. What they look for
Broadly speaking, angels and venture capitals (VC) focus on businesses at different stages of their life cycle. Angel investors generally tend to invest following early-stage funding received by founders from friends and family members. As such, angels usually invest in businesses and startups at an earlier stage of their lifecycle. By contrast, VCs are less interested in early-stage ventures and prefer more established businesses.
2. Funds
Broadly, angel investors are individuals, often successful business people or high networth individuals. Angel investors are likely to use their own funds for purposes of investing.
Conversely, venture capitalists (VC) manage the pooled money of others in a professionally managed fund. VCs generally take a larger stake than an angel investor. VCs tend to focus on more advanced and well managed ventures and are far more driven by return on investment metrics.
3. Amount invested
As a general rule of thumb, VCs invest larger amounts than angel investors. This is in keeping with our earlier comments about VCs investing in more established ventures. As you’d expect, a more established venture is likely to have greater funding needs than an early stage business. Conversely, angel investment tends to range between $50k – $250k, an investment size better suited to early stage ventures.
4. Investment rationale
Angels are less likely to be actively involved in your business. Having said this, more attractive angel investment will usually help your startup with contacts, mentorship and / or specialist industry knowledge. Conversely, VCs tend to seek an active involvement and are more likely to seek a board position so they can influence the overall direction of the business. This is because VCs will be far more driven by return on their investment, noting that VCs could be investing millions of dollars in your business.
Which Is Better?
There is no one size fits all when it comes to investment. Securing investment in your venture is a critical milestone and something that you are likely to require at various stages in the business’ lifecycle. If your venture is early-stage, a business angel is probably a better fit. Conversely, once your venture is up and running, you can start thinking about VC investment.
Need Help?
At Allied Legal we help startups and scale ups negotiate and finalise fundraising transactions of all sizes. Be it angel or VC investment, we are here to help. If you want to know more about how we can help, give us a call on 03 8691 3111 or send us an email at hello@alliedlegal.com.au.
